August 28, 2017
There are many different tax planning strategies, of which a tax professional will happily guide you through, but the most basic tax planning strategies are designed to reduce the amount of your taxable income, and increase the amount that you are refunded. Tax refunds are based upon how much more tax you pay, than what you owe.
Tax laws can be complex, and often it can be hard to make sense of them, but here is a brief guide to tax planning, for those individuals who may wish to understand a little more, even if they are using the services of a tax professional.
How to plan your deduction method:
You are given a choice when completing your tax return, between standard deduction methods, or itemized deduction methods, both of which are used to determine your taxable income.
Standard deduction is a dollar amount that the government have set, and you’re able to claim this without accounting for the expenses that would usually be associated with a taxpayer’s allowed deductions. Itemized deductions are expenditures made for deductible expenses. These may amount to more in a tax year than the standard deduction amount, and if that is true, then you will probably go on to pay less tax or be entitled to a bigger refund using the itemized deduction method.
The only drawback with using the itemized deduction method, is that you must provide evidence of receipts and other documents to support your purchases. Having said that, keeping receipts may also come in handy even if you’re claiming the standard deduction.
Using tax credits to help reduce your tax bill:
Refundable tax credits can help to lower your tax bill by creating a surplus, which then results in a refund. If you’re on a low income, then you may qualify for earned income tax credit.
You may be able to apply for child and dependent care credit, which comes into play if you finance the care of children or disabled dependents to allow you to work, or seek employment.
Child tax credits of up to $1,000 for dependent children under the age of 17, may be applicable to you, provided the child, or children, qualify.
If you’re on an income below a certain level, you may qualify for the retirement savings contribution credit, which is over and above other tax savings that you’ve earned from contributions to IRA’s or any other retirement plan.
American opportunity tax credits reach a maximum amount of $2,500 per student that meets the requirements, with 40% being refundable, and can be used to offset some of the costs associated with post-secondary education in the first 4 years of college or university.
Strategies using retirement savings plans:
Tax reductions now, and income later, can be greatly affected by retirement plans, and many tax payers turn to them. If the tax rate is good, such as 25%, then the amount you contribute towards a retirement plan can end up saving you whole lot of money on your current tax return. Unless you withdraw the money in your account, your investment earnings will not be taxed, so you can see how putting as much as you can afford annually, into your retirement account, could be an effective form of tax planning.
Other tax savings plans:
Retirement plans may be attractive to many for the reasons mentioned above, but there are other types of savings plans, that can help you to defer tax (and in some cases, even to avoid tax), such as 529 college savings plans, health coverage savings plans and dependent care savings accounts.
To know more about each of these strategies, it’s best to contact your tax professional, and if you don’t have one, it’s highly recommended that you find one, well in advance of filing your tax return.
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